Glossary of Mortgage Definitions

When you are purchasing a home using a mortgage, there are often a lot of words used during the process that you may not understand what their full meaning is. Here is a list of terms that are commonly used when dealing with mortgages to help you better understand what your lender is saying and how the process of obtaining a mortgage works.

Mortgage Loan: The term mortgage loan is the term used for the lending of money, secured by a mortgage on real property. The actual mortgage refers to the legal security of the property in lieu of the money being lent, which really means that your house is collateral for the loan.

Property: The term property means the actual physical house that is being financed through the lending institution.

Mortgage: The term mortgage, although used quite interchangeably, is the security (think collateral) that is created on the house by the lender. This means for you that if you do not pay your payments, the bank can sell the house to recoup the money they lent you. Mortgages usually have some restrictions or requirements, such as the use of the property, disposal or selling of the property and requirements of home insurance.

Borrower: The borrower is you—the person wishing to purchase the house who will be the owner of the property and the person responsible for paying the mortgage on the house.

Lender: The lender is the financial institution or bank that you are borrowing the money from to purchase the house.

Principal: The principal is the original size of the loan (price of the house, minus the money you put down as a down payment). As you pay your mortgage payments, parts of that goes towards the principal—thusly reducing the amount owed on the house.

Interest: The interest is the rate of the financial charge for using the lender’s money to purchase a house. Interest rates vary radically from month to month, week to week and day to day, even. It’s important to understand how much your interest rate is and how often it changes, if ever. Ideally, you want a low interest rate.

Down Payment: The down payment is the amount of money that you give the lender to get the mortgage. The down payment can be between five and 25 per cent of the total cost of the house. The most common down payment is 10 per cent—so if the house is valued at $100,000, you would need $10,000 in cash to put down on the mortgage. Thusly, the principal of the mortgage would then be $90,000.

Foreclosure or Repossession: If you do not pay the mortgage payments, the lender may foreclose on your house, meaning they seize the property and sell it to recoup their investment (the mortgage principal). This ability and possibility for the lender to repossess or foreclose on your home is essential to having a mortgage.

Amortization: Amortization is the decreasing amount of your mortgage over a period of time. Amortization refers to the length of the total mortgage—how long it will take you to pay the entire principal of the mortgage. Commonly, amortization for a mortgage is 20 to 25 years.

ARM: ARM stands for adjustable rate mortgage. An ARM mortgage has a floating interest rate that changes with the current prime interest rate.